(1 of )Luther Burbank Savings located at 804 Fourth St. in Santa Rosa.

Luther Burbank Savings settles suit over loan practices

ROBERT DIGITALE

THE PRESS DEMOCRAT | September 13, 2012

Luther Burbank Savings will spend $2 million to settle a federal lawsuit accusing the Santa Rosa lender of discriminating against African-American and Latino borrowers with a jumbo loan program that targeted wealthy individuals.

Under the settlement with the U.S. Justice Department, Luther Burbank created a new division to increase conventional lending in minority communities.

The thrift, Sonoma County's largest financial institution with $3.6 billion in assets, did not admit wrongdoing. Luther Burbank is settling the lawsuit to avoid long and costly litigation, said John Biggs, the thrift's president and chief executive.

"We do not believe we discriminated," Biggs said in an interview late Wednesday.

In a press release, Biggs added that Luther Burbank is "proud of our record on nondiscriminatory lending, and we will do everything possible to make a positive difference in the communities within our marketplace."

Founded in 1983, Luther Burbank specializes in making loans to owners of apartment buildings, many of them in minority neighborhoods. Its policies for those loans were not challenged by the Justice Department.

Instead, prosecutors focused on a smaller line of business that issued jumbo loans through independent brokers to wealthy borrowers. Those loans account for about 15 percent of its portfolio.

The bank chose to offer only "non-traditional" loans -- including interest-only and stated-income loans -- to high-income borrowers for amounts greater than $400,000. Such loans, when offered by other institutions to first-time home buyers, have been faulted for helping lead to the subprime loan crisis. Historic numbers of borrowers were unable to make their loan payments or keep their homes, resulting in huge financial losses at banks and a sharp downturn in the housing market.

The Justice Department lawsuit alleged that because Luther Burbank would lend no less than $400,000, very few African-American and Latino borrowers were able to qualify for its loans.

In the greater Los Angeles area, for example, only 5.8 percent of Luther Burbank's single-family residential mortgages from 2006 through 2010 were issued to African-American and Latino borrowers, compared to 31.8 percent by comparable prime lenders, the Justice Department said.

"It is critical that lenders have policies in place to ensure that they don't discriminate in their lending programs," Thomas E. Perez, assistant attorney general for the Civil Rights Division, said in a statement.

The settlement, filed Wednesday in U.S. District Court in Los Angeles, is the latest to emerge from an Obama administration task force searching for fair-lending violations during the housing boom. It has reached settlements in 18 cases for $370 million, including agreements in July with Wells Fargo and in December with Bank of America.

"The Department of Justice will not allow financial institutions to have in place residential lending practices that illegally impact minority communities," Andr?Birotte Jr., the U.S. Attorney in Los Angeles, said in a statement.

Luther Burbank's attorney, Andrew L. Sandler, said the case represented the Justice Department's "most aggressive use of the disparate impact discrimination theory." He was referring to the use of a statistical analysis to allege discrimination.

"It has accused a bank of discrimination because it offered only non-traditional portfolio loan products to high net-worth individuals, and is imposing as part of the settlement a requirement that it offer additional loan products in order to obtain more loans from minority borrowers," Sandler said in a statement.

Luther Burbank will now spend $2 million on initiatives to increase lending in minority neighborhoods in California.

Under the settlement, which is subject to court approval, the thrift will invest $1.1 million in a financing program to increase the amount of credit it extends to residential borrowers seeking loans of $400,000 or less.

It also will spend: $450,000 in partnerships with community-based organizations; $300,000 for outreach to potential customers; and $150,000 on consumer education programs.

Although based in Santa Rosa, Luther Burbank operates branches in San Rafael, Los Altos, San Jose, Beverly Hills, Burbank, Encino and Pasadena.

The Los Angeles Times contributed to this report. You can reach Staff Writer Robert Digitale at 521-5288 or robert.digitale@ pressdemocrat.com.